The Phaserl


A Tale of Two Justice Systems – Wall Street vs. Main Street

by Michael Krieger, Liberty Blitzkrieg:

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

– Charles Dickens, A Tale of Two Cities

One of the major objectives of this site over the years has been to highlight the demoralizing and extremely destructive reality that two completely different justices systems exist in America — one for the wealthy, powerful and connected, and another for everyone else. While there will always be some element of this in any society of humans, extremes can and do occur, and the pendulum now has shifted in these United States to extremely dangerous Banana Republic-like levels.

Nowhere is this divergence of justice more in your face and deplorable than with respect to how Wall Street financiers are treated compared to the rest of us. Not only was the industry rewarded with endless financial lifelines and zero executive prosecutions after it destroyed the global economy, but the industry continues to do whatever it wants, whenever it wants, with zero repercussions. It doesn’t take genius to understand that if there’s no risk in committing financial crimes, you get a lot more of them.

Speaking of Wall Street being able to do whatever it wants, let’s take a look at what Goldman Sachs is up to courtesy of some excerpts from a recent article by David Dayen published at The Fiscal Times:

Goldman Sachs is on a shopping spree. Last week, it spent $500 million to buy 12 percent of Riverstone Holdings, a private equity firm focused on energy investments. This is part of a $2 billion private equity strategy for the vampire squid. Through a couple of subsidiary funds, Goldman has already acquired stakes in private equity players Littlejohn & Co. and ArcLight Capital Partners, and Accel-KKR, a firm specializing in tech companies.

There’s only one problem with these investments: They’re supposed to be illegal under the Dodd-Frank Act. But “the law” is only as good as the men and women willing to enforce it, as Goldman Sachs has discovered to its delight. Big banks have turned one key section of Dodd-Frank into mush, such that Goldman can flaunt its defiance openly without an ounce of fear. It makes me wonder why House Republicans are working so hard to repeal Wall Street reform when regulators have shown so much willingness to repeal by neglect.

Bank lobbyists weakened the Volcker rule before it was finalized. Then-Senator Scott Brown, the 60th vote for Dodd-Frank in the Senate, inserted a loophole that enabled firms like Goldman Sachs to keep a “de minimis” 3 percent stake in hedge funds or private equity firms. But what Goldman announced with Riverstone equaled four times that number. How is this allowable?

Under a regulatory interpretation from the Federal Reserve, if a new investment fund is in its “seeding” phase, banks can own as much as 100 percent for a “brief period” of up to one year. But Riverstone isn’t new, having been founded in 2000. However, if the investment were structured to look like it’s initiating new funds within Riverstone, the Fed could accept the deal.

At least under that interpretation, Goldman would have to scale back its investment to the 3 percent threshold after a year, right? Wrong. In their rule, the Fed officials write that they “understand that the seeding period… may take some time, for example, three years.”

The Fed has been all too happy to grant elongated timelines for the Volcker rule. Banks initially had four years from the passage of Dodd-Frank to get rid of existing investments in hedge funds and private equity firms. But the Fed delayed the divestiture for a year, then for another two years, which defied the statute, because the central bank was only permitted to delay one year at a time. Last week we learned in Goldman Sachs’ quarterly financial report that last December, the Fed allowed banks to apply for another five-year extension to liquidate the investments. “The firm received this extension for substantially all its remaining investments,” according to the filing.

So Goldman Sachs doesn’t have to jettison its old private equity investments, doesn’t have to limit itself to a 3 percent stake on new investments and doesn’t have to reduce those new holdings for at least three years. You begin to wonder whether the Volcker rule exists in name only, with the dictates mere suggestions instead of directives.

Even if Goldman were misbehaving, Volcker rule enforcement has been practically non-existent. Since the 2014 implementation date, exactly one bank has been fined for non-compliance, for a grand total of $19.7 million.

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